Friday 17 April 2009 19.01 EDT
First published on Friday 17 April 2009 19.01 EDT

Citigroup has delivered its first underlying profit in 18 months, fuelling hope that Wall Street's credit crisis may be easing despite a surge in bad debts arising from consumer loans and credit cards.

The once mighty bank, which has taken a severe battering from the financial downturn, reported a $1.6bn (£1.1bn) profit for the first quarter, aided by a 99% leap in revenue to $24.8bn. But the surplus was wiped out once Citigroup paid hefty dividends to the preference stockholders who invested to keep the bank afloat. It was left with a bottom-line loss of $966m.

The bank's improved performance followed stronger-than-expected earnings reported by JP Morgan and Goldman Sachs this week, creating a fragile sense of optimism on the financial markets that the teetering US banking industry may have pulled back from the brink of oblivion.

Citigroup's chief financial officer, Edward "Ned" Kelly, described the three months to March as "the strongest quarter we've had in well over a year", achieved by steadily reducing the bank's exposure to risky assets and by cutting costs, with a loss of 13,000 jobs. But he added: "While we've made progress, the environment continues to be challenging."

Kelly said the bank could face further choppy waters if "general market conditions remain uncertain and credit conditions among consumers continue to deteriorate." Burdened with liabilities on sub-prime mortgages and toxic derivatives, Citigroup has received $45bn of emergency funding from the US treasury to support its ailing balance sheet.

The bank has sold billions of dollars' worth of preference shares to overseas investors, including the Singaporean government's investment arm and the Saudi prince Al-Waleed bin Talal.

Under a plan outlined in February, these investors are to swap their preferred shares for ordinary stock in a transaction that will give the US government a stake of up to 36%. This operation has been delayed until the treasury completes a series of "stress tests" to determine the viability of 19 top banks.

Some believe Citigroup will rank near the bottom of the institutions tested. Christopher Whalen of research firm Institutional Risk Analytics said: "Clearly, Citi is among the banks that will come in with the worst results."

Citigroup recorded $10bn in credit costs during the quarter, comprising $7.3bn in loan losses and provisions of $2.7bn against future losses.

In a significant turnaround, the firm's institutional clients division, which includes its Wall Street investment banking operation, swung from a $6.3bn loss to a $2.8bn profit. But in common with its rivals, Citigroup encountered belt-tightening among its high street customers, with a loss of $1.2bn in consumer banking and a 66% slump in credit card profits, which fell to $417m.

The figures are likely to bring some comfort to Citigroup's chief executive, Vikram Pandit, who has come under intense pressure to stabilise the bank's position. At one stage last month, Citigroup's share price, which was over $20 a year ago, slipped below $1, prompting suggestions that the firm could be kicked out of the blue-chip Dow Jones industrial average index. The stock slipped 42 cents to $3.59 in early trading yesterday.

Bart Narter, an analyst at the financial consulting firm Celent, said that although Citigroup's investment banking had improved, there were worrying signs on the consumer front: "Times are tough and getting tougher in the card business. Some of Citi's business units are running well, others could be doing far better."

On a conference call with analysts, Citigroup's Kelly said: "There has been slightly more of an acceleration in terms of credit deterioration internationally, compared to the US, over the last couple of months." Britain, Spain, Greece, Mexico and India were main areas of concern terms of weakening consumer credit, he said.